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Business law harmonisation – yeah, nah

18 Dec 2015

Trans-Tasman harmonisation is a large factor in New Zealand business law development – but not an over-riding one.

Among the traditional pre-Christmas rush of policy releases are two announcements which will set New Zealand apart from Australia – in one case because we’re not going ahead with a flagged change, in the other case because we probably are and Australia may not.

Cartel criminalisation

The first is the announcement by Commerce Minister Paul Goldsmith that he is going to axe criminal sanctions in the Commerce (Cartels and Other Matters) Amendment Bill which would have imposed a prison term of up to seven years for “hard core” cartel conduct. The expanded definition of cartel conduct will remain.

Since the Commerce Act came into force in 1986, New Zealand courts have issued price-fixing judgments in respect of 17 cartels. The largest of these were in the domestic wood chemicals industry and in the international air cargo and freight forwarding industries.

The Cabinet paper on the Bill shows that the arguments around the move were always finely balanced.
The main negatives were that the uncertain scope of the criminal prohibition might deter legitimate, market-enhancing business activities and that it would increase compliance and enforcement costs. The main positive was that it would bring New Zealand into step with comparable countries, in particular Australia.

Goldsmith’s two National Party predecessors in the portfolio, Simon Power and Craig Foss, decided that the benefits outweighed the costs but the proposal was always controversial and, following what Goldsmith describes as “further engagement with stakeholders”, he reassessed the cost-benefit analysis.

His conclusion, as reported to the Cabinet was:

“I think there is a significant risk that cartel criminalisation will have a chilling effect on pro-competitive behaviour, particularly given the difficulties of targeting the criminal offence to ‘blameworthy’ cartel conduct that causes significant public detriments”.

Instead Goldsmith is going to rely on the deterrent power of existing civil penalties in the current Act. These are for fines of up to $500,000 for individuals and up to $10 million for companies or three times the value of any commercial gain resulting from the offence, or 10 percent of turnover during the accounting periods over which the activity occurred. Banning orders of up to five years are also available.

The Bill exempts “collaborative activity” which involves a cartel element where the collaboration is reasonably necessary to give effect to the arrangement and the agreement has not been entered into for the dominant purpose of reducing competition. It also provides for a clearance process under which an entity can apply to the Commerce Commission to test whether a proposed contract contains a prohibited cartel provision.

Now that the threat of prison has been removed, the main risk for directors and senior management is that the scope of the collaborative activity safe harbour is uncertain and will need to be established through the courts, or through the proposed clearance regime.

An effects test for the misuse of market power

Just as the Australian Government has put the move to an “effects test” for the misuse of market power on indefinite hold, officials in New Zealand have picked up the baton.

In November the Ministry of Business, Innovation and Employment (MBIE) issued a discussion document for a “targeted review” of the Commerce Act, including possible changes to section 36 which (like your section 46) asks whether the purpose of conduct by dominant market players in specific instances is to exclude competitors.

Other jurisdictions ask what the effect of the action is, although intent is not entirely irrelevant as an intention to deter competition will increase the likelihood of regulatory intervention.

MBIE is responding to a criticism, principally advanced by the Commerce Commission and the ACCC, that the current formulation of section 36 sets too high a bar for enforcement. MBIE’s preliminary view is that section 36 is not operating satisfactorily because it is:

failing to punish anti-competitive conduct by powerful firms

too complex to allow for cost-effective and timely application, and

misaligned with sections 27 and 47 in the Act, both of which use an effects test rather than the “purpose test” currently used in New Zealand and Australia (although not in the US, the EU or Canada).

Australia’s decision to kick for touch on this issue may cause the New Zealand Government to think again and certainly removes what would otherwise have been a strong argument for reform. But the Commerce Commission, which has long chafed against the perceived limitations of section 36, will be a powerful advocate for change.

Submissions are due by 9 February. MBIE will then develop a firm set of reform proposals which it will put out for further consultation. It will be interesting to see whether the effects test proposal proves as contentious here as it was in Australia and how the Australian experience reverberates in the New Zealand debate.

When the issues paper was written, the Australian Government’s response to the Harper Review had not been made public but MBIE has undertaken to have regard to it as part of its submission consideration.

Neil Anderson is a partner at Chapman Tripp and Simon Peart is a senior associate. Both specialise in competition and regulatory law.